Ithaca profitable at $10 a barrel

A few weeks after posting solid first-quarter production figures and news of a sharper hedging strategy, Ithaca Energy (IAE) has received a so-called 'statement of claim' from a law firm. This alleges that the North Sea driller misrepresented the timetable for some modification works at its key Greater Stella Area (GSA) development. But analysts at First Capital Energy believe "the bar for success against the company will be high". They do not expect the potential liability to be material.

Ithaca's hedging strategy accounted for three out of every five dollars of operating cash flow during the quarter. Management has decided to bolster the group's hedge cover beyond first oil at the GSA. Until then, Ithaca's break-even rate on Brent crude is effectively $10 a barrel, including gains on derivatives.

At 12,489 barrels of oil equivalent per day (bopd), first-quarter production was 4 per cent ahead of guidance, while operating costs were 30 per cent below the average level achieved in 2014. But costs are likely to increase slightly in the second half due to maintenance work. The subsea work programme at the GSA is already well advanced, with the remaining installation process scheduled for completion by the end of the third quarter.

Westhouse Securities says...

Buy. Ithaca has extended its hedging to June 2017, enhancing its medium-term protection. The principal cover - 8,300 bopd at $91 a barrel - runs through to June 2016, and a further 4,000 bopd have been secured at $69 a barrel for the year from July 2016. The group remains focused on the GSA development, which is due for start-up in the second quarter of 2016. The claimant in the recent statement of claim will have to prove a consequential loss to have any hope of extracting damages. Ithaca is sheltered from corporation or supplementary tax until 2020, and we maintain our core valuation of 176p a share and price target of 80p.

Edgecrest Capital says...

Upgrade to buy. The risks have diminished. First-quarter cash flow per share was 27¢ (against 13¢ in 2014), which included 18¢ from the acceleration of the group's hedge position. Operating costs were also below guidance. Net debt is expected to peak at 95-100 per cent of book value during the current quarter, and then fall as spending on the GSA drops significantly. The level is well within debt-funding capacity. We have set a new target of C$1.50 (79p) a share (up from C$1.25), reflecting a reduced discount for execution risk.